Argentina has finally run out of wiggle room in a billion-dollar showdown over foreign debts unpaid since the country's world-record default a decade ago, and the stakes couldn't be higher for President Cristina Fernandez.
Late Wednesday night, a federal judge in New York ordered Argentina to pay immediately and in full everything it owes to what she calls "vulture funds" that she blames for much of her country's troubles. That adds up to $1.3 billion, due by December 15.
'It's a mess … Default could happen' —Goldman Sachs analyst Alberto Ramos
The judge also barred Argentina from paying other bondholders until it satisfies this judgment, putting the president's back against the wall: If she doesn't reverse her longstanding position and pay up, she risks triggering another historic Argentine debt default, this time totalling more than $20 billion.
"It is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes. After ten years of litigation this is a just result," U.S. District Judge Thomas Griesa concluded.
Argentina's government did not immediately respond to Griesa's orders, delivered just before the long Thanksgiving holiday closed markets in New York until Monday.
Sen. Augustin Rossi, who leads the ruling party's bloc in Congress, said in a local radio interview Thursday that he personally thinks Argentina's government would be within its rights to reject it, "on behalf of all the Argentines, after we've made such an enormous effort to get out of default."
Argentina's president and economy minister insisted earlier this week that they won't pay a single dollar to the plaintiffs, and said they would appeal to the U.S. Supreme Court. But the judge gave Fernandez no room to manoeuvre meanwhile, lifting his stay and ordering that the money be put in an escrow account for the plaintiffs to collect.
"These threats of defiance cannot go by unheeded," the judge wrote. "The less time Argentina is given to devise means for evasion, the more assurance there is against such evasion."
If Fernandez refuses, the judge said that the Bank of New York, which processes Argentina's bond payments, will find itself in violation if it doesn't hold up payments to all other bondholders.
"It's a mess. This does not help Argentina. Default could happen," Goldman Sachs analyst Alberto Ramos in New York said Thursday. "The markets will react negatively to this.'
The remedy also sent jitters through the legal departments of the most powerful financial institutions in the United States.
The U.S. Federal Reserve and the Clearing House, a trade group representing the world's largest commercial banks, told the judge to make sure his order won't affect the U.S. funds-transfer system, which automatically moves an average of $2.6 trillion a day in half a million transfers between more than 7,000 banks.
The entire system depends on transfers being "immediate, final and irrevocable" when processed. Requiring intermediaries to identify, stop and divert payments according to court orders "would impede the use of rapid electronic funds transfers in commerce by causing delays and driving up costs."
The judge dismissed these concerns Wednesday night, saying among other things that "if Argentina complies with the rulings of the Court of Appeals, there will be no problem."
As with so many other things involving Argentina, this case is rooted in the bloody dictatorship that ruled from 1976-1983. The military junta more than tripled the country's foreign debts. By 2001, the burden had become unsustainable and the economy collapsed. Argentina's $95 billion default still stands as a world record.
Sovereign debt is supposed to be paid no matter who runs a country, but Fernandez has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators. She and her late husband and predecessor Nestor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.
Instead, they offered new bonds paying less than 30 cents for each dollar owed in default, and by 2010, 93 per cent of the original bondholders agreed to the swaps. The debt relief granted by these "exchange bondholders" enabled Argentina to climb out of a deep economic crisis, and many analysts have described it as a model for Greece and other debt-burdened countries to consider.
Holdouts led by NML Capital Ltd., an investment fund owned by U.S. billionaire Paul Singer, refused the swaps, insisting on payment in full plus interest. Singer's lawyers have travelled the world since then seeking to embargo Argentine assets, even getting its navy ship Libertad seized in Ghana as collateral. But they have never collected.
The judge's solution to all this is to force Argentina to pay the holdouts an equal amount each time it makes a payment to the exchange bondholders. And since the latter group is due to get $3.3 billion on December 15, the judge said the holdouts must get their entire $1.3 billion by then as well.
Exchange bondholders who collectively own $20 billion in the restructured Argentine debt had argued that they "already suffered tens of billions of dollars in losses," and that it's not fair to harm their already diminished returns so that a few holdouts can earn up to 200 per cent on debt they bought for pennies on the dollar after Argentina's collapse.
If allowed to stand, this kind of remedy will make it impossible for other countries to get critical debt relief, they argued.
But the judge said his remedy is fair.
"The exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating," while the holdouts spent years unsuccessfully trying to make Argentina pay, he wrote.
Fernandez sought to calm matters earlier in the week, noting that Argentina has $45.3 billion in reserves and a much lighter debt burden than it did years ago.
But if Argentina does comply with the ruling, Moody's Investors Service said Monday that it could set a legal precedent for other holdouts who together claim nearly $12 billion in unpaid debts.
Ramos, the Goldman Sachs analyst, agreed that "if Argentina pays, all the other holdouts that are not covered by this ruling will get involved."
"I could see this extended very quickly. Then again, $12 billion is not beyond Argentina's ability to pay. After all, they're using $10 billion of their reserves each year to pay for government programs. And I think paying off its debts would be a good use of those reserves," Ramos said.
If Argentina doesn't fully meet its payments in December, however, the exchange bondholders could demand immediate payment on their entire $20 billion. And if this happens, "the injunction will have turned a relatively minor default into a cataclysmic default that will further unsettle the already fragile global economy," the exchange bondholders warned.